Loyola University Chicago School of Law, JD 2020
California Governor Jerry Brown signed a historic bill on September 30 that mandates every publicly held corporation whose principal offices are located in California to have a representative number of women on its board of directors. In a letter announcing Senate Bill 826, Governor Brown admits that there are serious legal concerns to the bill and that its potential flaws could “prove fatal to its ultimate implementation” but that it is time to force action regarding the lack of gender diversity on company boards.
Law to take effect in 2019
The controversial new law will require publicly traded corporations headquartered in California to have at least one woman on their boards of directors by the end of 2019. By July 2021, boards with five members must include at least two women and boards with six or more members must include at least three women. Failure to comply with the law will result in a $100,000 fine for first-time violations and $300,000 for subsequent violations. According to Hannah-Beth Jackson (D-Santa Barbara), one quarter of California’s publicly traded companies have no female representation on their boards of directors. Shannon Gordon is CEO of theBoardlist, a company that connects qualified women that may be overlooked for leadership roles with investors and executives. She says the gender diversity problem is extensive and that at its current rate corporate boardrooms will not reach gender parity until 2055.
Opposition despite good intentions
Despite large and indisputable gender disparities on corporate boards, the bill faces strong opposition from a business groups and companies. The California Chamber of Commerce says the bill violates existing law and both the state and US constitutions, as it will displace board members solely on the basis of gender. A coalition of thirty business groups opposed to the new legislation reiterated their commitment to workplace diversity but felt that SB 826 prioritizes gender diversity over other aspects of diversity.
Scope and applicability of SB 826
While many large publicly traded companies are based in California, a company is not governed by the laws of the state where it has its principal offices. More than 80% of those companies are actually chartered Delaware, meaning the law would not apply to them. University of San Diego professor Annalisa Barrett says there are 377 California-based companies in the Russell 3000 index of publicly traded US companies that will be impacted by the law, and 684 women will be needed to fill board seats by 2021. Stanford professor and long-time advocate for increasing women and minorities on corporate boards Joseph Grundfest also ran the numbers and sees a smaller impact. His analysis suggest that the only Fortune 500 company headquartered and chartered in California that would need to add a female board member is Apple, which would need to add one woman to its eight-member board next year and another by the end of 2021.
More harm than good?
Governor Brown acknowledged the forthcoming challenges to defending SB 826 in the letter he wrote to announce its enactment. Some, like Professor Grundfest, agree strongly with the intent of the law but are concerned that in its current format it will do more harm than good. Analysis performed by the State Legislature found that the law “would likely be challenged on equal protection grounds, and the means that the bill uses, which is essentially a quota, could be difficult to defend.” Critics of the bill are concerned that progress to make boardrooms more diverse could be bogged down in lawsuits and lead corporate legal departments to prohibit leaders from publicly stating diversity goals.
Despite concerns about SB 826, it is nearly universally popular and most Californians agree with Governor Brown that now is the time to force the issue. A poll from the Boardlist found 95% of Californians believe corporations are not doing enough to add more female directors, and 71% support SB 826. While California’s bill is the first of its kind, the poll found that 98% of respondents living outside California would like to see a similar bill passed in their home states. Numerous studies suggest that diversity in the boardroom contributes to better profitability and stock price returns. Despite strong evidence supporting the benefits of diversity on company performance, fewer than 20% of companies in California have followed a 2013 non-binding resolution to increase the number of women on their boards.
Even though supporters of the bill admit it is flawed, many are encouraged by the awareness the bill has raised regarding the need for increased diversity on company boards. Institutions controlling trillions of dollars of investments, including pension funds CalPERS and CalSTRS and investment firms State Street and BlackRock, have begun to take an interest in diversity and other environmental, social, and governance issues. These institutions hold large stakes in most publicly traded US companies and can force company management to take diversity seriously through shareholder proxy votes. BlackRock publicly stated in February of 2018 that it expects to see at least two women on every board. While the market may be shifting in a direction that will eventually demand equal representation on company boards, the impact of SB 826 on board diversity is yet to be determined. Given its widespread support, signing the bill is not politically risky for Governor Brown. The likely legal challenges the bill will face in the coming months and years should not overshadow the fact that women are vastly underrepresented on company boards of directors in California and across the United States.